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Storage costs in commodity option pricing

Hinz, Juri and Fehr, Max (2010) Storage costs in commodity option pricing. SIAM Journal on Financial Mathematics, 1 (1). pp. 729-751. ISSN 1945-497X

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Identification Number: 10.1137/090746586

Abstract

Unlike derivatives of financial contracts, commodity options exhibit distinct particularities owing to physical aspects of the underlying. An adaptation of no-arbitrage pricing to this kind of derivative turns out to be a stress test, challenging the martingale-based models with diverse technical and technological constraints, with storability and short selling restrictions, and sometimes with the lack of an efficient dynamic hedging. In this work, we study the effect of storability on risk neutral commodity price modeling and suggest a model class where arbitrage is excluded for both commodity futures trading and simultaneous dynamical management of the commodity stock. The proposed framework is based on key results from interest rate theory.

Item Type: Article
Official URL: https://www.siam.org/journals/sifin.php
Additional Information: © 2010 Society for Industrial and Applied Mathematics
Divisions: Centre for Analysis of Time Series
Subjects: Q Science > QA Mathematics
Sets: Research centres and groups > Centre for the Analysis of Time Series (CATS)
Date Deposited: 25 Feb 2014 16:53
Last Modified: 20 Feb 2019 09:41
URI: http://eprints.lse.ac.uk/id/eprint/55863

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